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New research suggests that stopping banks from having private equity arms, as proposed by the original version of the Volcker Rule, may not be such a bad idea.

The research, from Lily Fang of INSEAD and Victoria Ivashina and Josh Lerner of Harvard University, looks at 7,902 private equity transactions between 1978 and 2009. It finds 26% of them were done by bank-affiliated private equity groups - Goldman Sachs Capital Partners, Merrill Lynch Capital Partners, DLJ Merchant Banking and so on. This percentage was even higher at peaks in the market, reaching 30% in the recent credit boom, for example.

The research shows that deals done by bank-affiliated groups - as opposed to independent private equity firms - enjoy "a significantly larger borrowing amount, a longer maturity, and a lower spread" when the parent bank is in the syndicate, the authors wrote. The average loan size in such cases is $801 million versus $612 million for the sample overall, while the pricing is 47 basis points lower than the average 317 BP spread in the sample. The average maturity of the loan is 10 years versus six years.

The findings also indicate that bank-affiliated deals have slightly worse outcomes, even though the target companies of bank PE arms have a "significantly better operating performance than other targets" before their buyouts. The researchers found that the bank sample had a 7.7% ratio of bankruptcies versus the non-bank sample's 5.7%, and that a smaller fraction of bank deals - 63% versus 74% - have profitable exit multiples.

Having a bank PE arm in a deal also increases the likelihood that the target company will pick the parent bank for its future banking needs. The parent bank is 22% more likely to be chosen as a future lender than unaffiliated banks, 7% more likely to win future M&A mandates, and 18% more likely to win future book-runner business, the research finds.

The results suggest that "there are risks in combining banking and private equity investing" in a number of ways, the authors write. Also, due to banks' higher representation in the market during boom periods, "These investments do seem to exacerbate the amplitude of waves in the private equity market, leading to more transactions at precisely the times when the private and social returns are likely to be the lowest."